A Joint Venture with CAPP: Canada’s lifeblood

Canada’s natural resource wealth is a vital contributor to national, provincial and territorial economies, and to the quality of life enjoyed by Canadians.

Close to 800,000 people work in the sector and an equal number are employed nationwide through related jobs in construction, manufacturing, technology, transportation and services. What’s more, government at all levels benefit from the huge revenues generated from taxes and royalties — revenues that contribute to the public purse and profit all Canadians through infrastructure projects and social and public services such as roads, hospitals and schools.

The natural resources sector, including forestry, metals, minerals and energy, accounts for more than 50% of all Canadian exports, represents about 15% of nominal gross domestic product and directly employs close to 800,000 people. The natural resources sector is also central to financial markets, representing more than 50% of all stocks traded on the Toronto Stock Exchange and more than half of all foreign investment, says Philip Cross, senior fellow at the Macdonald-Laurier Institute in Ottawa and former chief economic analyst with Statistics Canada.

However, misconceptions abound regarding Canada’s natural resource wealth. For example, there is a perennial belief the sector is cyclical and unstable. “In Ontario, high-tech companies are going bust but people don’t consider the sector unstable. Yet talk about resources and their perceived instability just never goes away,” says Cross.

“Outside of banking, no other sector has been as solid as resources, with oil and agriculture representing steadfast sources of growth for Canada in the recovery.”

Others argue resources are unevenly distributed across the country, creating regional inequality. However, Cross says that manufacturing is the leading cause of inequality. “When manufacturing in Central Canada booms, it disproportionately benefits Ontario and Quebec. But when resources boom everyone wins, because virtually every province has a sizable resource industry.”

In addition to the oil and natural gas wealth in Western Canada, he cites Saskatchewan and Ontario, which rank first and second in agriculture; Ontario as the largest producer of metal ores including gold, copper and nickel; British Columbia’s forestry products industry; and Newfoundland and Labrador’s offshore oil.

Questions also arise about Canada’s level of dependence on natural resources, with some arguing Canada has become a “petro-state.”

“There is a great deal of rhetoric around oil and gas, with many believing they represent a much larger portion of the economy than they do in actuality,” says Andrew Leach, associate professor with the University of Alberta School of Business and holder of the Enbridge Professorship in Energy Policy. “In Canada, oil and gas don’t even make up half of the resource sector, whereas in petro-states oil and gas is dominant.”

For example: Middle Eastern countries such as Qatar, where oil and natural gas account for more than 50% of GDP and 85% of exports; or Norway, where the share of GDP from oil and gas activity is four times that of Canada’s; and Russia, which produces some nine million barrels of oil per day and supplies most of Europe’s natural gas.

“While petro-states have a tendency to become corrupt and poorly run, Norway is an example that the opposite can be true — that you can have a western, liberal democracy with enviable social programs,” says Leach. “If Canada continues along its current path, evidence suggests we will look more like Norway than an autocratic petro-state.”

The ability to produce, extract and sell natural resources efficiently, combined with an established legal system and rule of law, give Canada a comparative advantage in the world, says Todd Hirsch, chief economist with Calgary-based ATB Financial. “In particular, our oil and gas are very important resources that are sought internationally. While other energy sources are beginning to come into play, hydrocarbons are what power the global economy. They are the most widely used and purchased in the world.”

For the oil and natural gas sector, some of that comparative advantage is lost due to extraction costs, but a more significant challenge is access to market. “Our oil and gas resources are land-locked and remote from major markets in Europe and Asia. This gives us a disadvantage when competing with Australia, the Middle East and even Africa,” adds Hirsch.

Canada is a small domestic market living next door to 300 million Americans — they represent the largest demand for our natural resources (except agriculture), says Cross.

“While relying on the U.S. for exports didn’t use to hurt us, the lingering recession and radical shift in oil and gas supply have brought vulnerability. We need pipelines to the West Coast so that we can diversify beyond the U.S. and command greater prices for our resources.”

Canada is in a league of nations that have built a successful and vibrant natural resource sector — our economy depends on its continued growth and success, Hirsch notes.

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